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Will Pressure Bust Pipes In Japan?

Conclusion: Mounting political pressure is incrementally supportive of our bearish long-term thesis on the Japanese yen vs. peer currencies. Additionally, we update our fundamental outlook on the Japanese yen, JGBs, and Japanese equities across multiple durations.

 

Our fundamental research view on the yen remains particularly bearish over the long-term TAIL and of all the potential ways to play our Japan’s Debt, Deficit and Demographic Reckoning thesis, shorting the yen vs. peer currencies (particularly the USD) remains our highest conviction idea.

 

As always, however, we don’t want to be short the yen at every price. In fact, as we highlighted in our MAR 30 note titled “Digging Deeper Into Japanese Sovereign Debt Risk”, our bearish intermediate-term view on global equities and high-grade sovereign S/T interest rates leads us to expect further JPY strength vs. peer currencies over that duration – absent a material acceleration in Japanese sovereign debt crisis risk (more on that later).

 

Will Pressure Bust Pipes In Japan? - 1

 

MOUNTING POLITICAL PRESSURE IS BEARISH FOR THE YEN OVER THE LONG-TERM TAIL 

From a political perspective, the pressure upon the Bank of Japan to end deflation grows seemingly by the day. In just the last few weeks alone, there has been a handful of what we’d consider critical signals in support of our view that the Bank of Japan’s balance sheet will expand materially over the long-term TAIL as the BOJ is forced to pursue its recently-adopted +1% inflation target: 

  • MAR: BOJ Governor Masaaki Shirakawa – openly opposed to accelerated BOJ financing of JGBs – agreed  to a 30% pay cut;
  • MAR: BOJ Deputy Governor Kiyohiko Nishimura was questioned by parliament on the idea of the BOJ adopting a measure similar to the Fed’s Operation Twist;
  • APR: The Liberal Democratic Party – the ruling Democratic Party of Japan’s largest opposition party – rejected BNP Paribas SA Economist Ryutaro Kono’s appointment to the BOJ’s monetary policy board, citing his hawkish lean and lack of commitment to combating deflation by any means necessary (the 9-member BOJ board currently has two vacant seats and appointees need to be approved by both houses);
  • APR: Shirakawa and Prime Minister Yoshihiko Noda met for ~1hr to discuss monetary policy; at the current pace (16 YTD), Shirakawa is on pace to exceed last year’s record total for Diet appearances;
  • APR: PM Noda announced that Economic and Fiscal Policy Minister Motohisa Furukawa will lead new ministerial meetings on the topic of overcoming deflation; Finance Minster Jun Azumi, Economy, Trade and Industry Minster Yukio Edano, and Financial Services Minister Shozaburo Jimi will all be in attendance at the regular meetings;
  • APR: The DPJ asked four of the five remaining non-governor BOJ monetary policy board members to meet later this month to discuss countering deflation. 

All told, we expect this level of political pressure to continue accelerating indefinitely, with the composition of the BOJ board likely getting incrementally dovish in the near term and finally cracking in a material way from a balance sheet perspective after Shirakawa’s departure as BOJ Governor one year from now. Recent moves in Japanese breakeven rates are also signaling this view.

 

Will Pressure Bust Pipes In Japan? - 2

 

AVOID THE WIDOWMAKER!

As previously mentioned, we  do not expect the yen to depreciate dramatically in the intermediate term unless a near-term Japanese sovereign debt crisis becomes a probable risk (as opposed to the tail risk that it remains currently).  Until that happens, we’d expect both JGBs and Japanese equities to trade as expected in an environment of yen strength. We quantify those relationships in the charts below.

  

Will Pressure Bust Pipes In Japan? - 3

 

Will Pressure Bust Pipes In Japan? - 4

 

Japanese equities, which we flagged last week as having snapped their immediate-term TRADE support, have corrected -5.9% since the USD/JPY cross peaked on MAR 14 (+3.5%). There remains additional downside risk from a mean reversion perspective, given the Nikkei’s +21.3% YTD melt-up to its MAR 27 cyclical top. 10yr nominal JGB yields are down -6pbs (-6.5%) from their cyclical top on MAR 15.

 

Turning our attention to our daily handicapping of the probability of a near-term Japanese sovereign debt crisis, the latest data points would suggest increased, but not heightened risk:

 

“RISK ON”: 

We are encouraged by Japan’s ability to get through the MAR maturity calendar unscathed. That said, however, the 2Q maturity wall looks quite hefty on a quarterly basis, suggesting to us that Japan isn’t out of the woods just yet from a refinancing risk perspective.

 

Will Pressure Bust Pipes In Japan? - 5

 

Turning to the new issuance calendar, the latest L/T bond auction (last Wednesday; 10yr maturity; ¥2.3 trillion offered), which was the first of FY12, posted the lowest bid-to-cover ratio (2.73%) and highest average yield (1.01%) in four months. 

 

Will Pressure Bust Pipes In Japan? - 6

 

We’re also closely monitoring the performance of Japanese bank equity and CDS, given their risk exposure to the JGB market (25.1% of assets). There’s nothing overly worrisome to report here, with the exception of Nomura’s 5yr CDS, which is up +56bps (+21.2%) from a trough of 257bps on MAR 19 to 320bps.

 

Will Pressure Bust Pipes In Japan? - 7

 

“RISK OFF”: 

One of the key indicators we’ve been watching to signal to us increased risk in the JGB market are L/T-S/T nominal yield spreads. This is due to our expectation that the JGB yield curve would steepen in an environment where a structural increase long-term inflation expectations and deteriorating credit fundamentals would slow the growth in demand for L/T JGBs relative to the short end of the curve – where default risk is not imminent – in an environment of accelerating supply. Recent trends here would suggest decreased risk of this event.

 

Will Pressure Bust Pipes In Japan? - 8

 

Other key indicators we’ve been monitoring are L/T JGB CDS. Both the 5yr and 10yr tenors have really come in over the last few months, declining -51bps and -43bps, respectively, from their YTD highs to 104bps and 141bps, respectively. The credit default swaps market is definitely not signaling increasing risk of a JGB sovereign debt crisis – an event that could potentially lead to default given Japan’s heavy debt service and refinancing burdens.

 

Will Pressure Bust Pipes In Japan? - 9

 

SENTIMENT:

We’ve compiled a list of quotes and statements below that we think are helpful in gauging consensus sentiment around a near-term JGB market crisis. While no one person/entity’s thoughts are omnipotent, we often find taking nuggets like these in conjunction to be helpful in vetting our own research conclusions:

  • “The risk of a tumble in government bond prices would increase if taxation and social security reform are left unsolved for years… Japan must quickly overhaul the tax and social security systems to prevent government borrowing costs from spiraling in the next decade.”  [Yasuhiro Sato, chairman of the Japanese Bankers Association]
  • “The country’s financial assets are dwindling with the aging population dipping into savings. Any delays to the reform that’s being debated may raise concern that bonds may be unable to be absorbed domestically in the long run, say, in 2022. But there are no signs of a JGB price plunge in the near term." [Yasuhiro Sato]
    • Refer to slide 80 of our presentation for a view of what this looks like graphically
  • “Japanese bond yields may rise toward the summer because of the cyclical economic recovery, uncertainty about the Bank of Japan’s policy stance and Japan’s political risks.” [Tetsuya Miura, chief market analyst at Mizuho Securities]
  • Japan risks going down the same road as Greece as the cost to fund the world’s largest public debt rises in [the] years ahead. When local investors reach their limit for funding the nation’s bonds, the Bank of Japan will either have to monetize the debt or we will need foreigners to purchase bonds and yields will jump to 3 percent. That will be the start of Japan becoming Greece.” [Takatoshi Ito, deputy vice finance minister from 1999 to 2001]

Japanese sovereign debt and currency risk poses a challenge for even the most sophisticated investors to wrap their heads around due to the idiosyncrasies of the JGB and JPY market(s). That said, however, every challenge poses a great opportunity for those looking to beat the odds and nail the major moves from both a timing and directional perspective. We will continue to update our thoughts on this subject, depending on the level and proximity of risk.

 

Darius Dale

Senior Analyst

 


JCP: RonJohn’s Circle Gets Tighter

 

JCP CFO Michael Dastugue is the next victim to Ron Johnson's company wide overhaul. COO Michael Kramer will replace Dastugue in the interim. While we’d ordinarily be less than thrilled with the prospect of a COO assuming the finance ranks, Kramer served as CFO at ANF (2005-2008) and Apple Retail (2000-2005). The only thing that bugs us here is that the finance function still remains very far removed from Ron Johnson in the org chart.

 

As it relates to the stock near-term, this is a big nothing.

 

New Structure:

JCP: RonJohn’s Circle Gets Tighter - new structure JCP

 

Legacy Structure:

JCP: RonJohn’s Circle Gets Tighter - old structure JCP

 


NEW MARKETS NOT GROWING THE OVERALL PIE

Have we reached saturation?  

 

 

There seems to be increasing evidence that domestic gaming will be a slow growth industry at best.  We will have a series of posts highlighting a fairly negative long-term thesis for US casino operators.

 

The following chart paints a bleak picture for domestic casinos.  Not only has domestic same-store growth been virtually nonexistent, but new markets have failed to grow the overall pie.  The big gap between same-store and total growth is disconcerting.  Following the onset of PA gambling, the gap widened significantly as markets such as Atlantic City and Connecticut lost share.  In Q4 2011, the gap was driven primarily by the opening of the Rivers casino in Illinois and Resorts World NY as well as new casinos in MD and IA earlier in the year. 

 

NEW MARKETS NOT GROWING THE OVERALL PIE - bbb


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THE HBM: PNRA, MCD, RT

THE HEDGEYE BREAKFAST MONITOR

 

HEDGEYE VIRTUAL PORTFOLIO POSITIONS

 

LONGS: EAT, JACK, SBUX

 

SHORTS: BWLD, DNKN, MCD

 

 

MACRO NOTES

 

Commentary from CEO Keith McCullough

 

Most Read (Bloomberg headline): “SP500 Caps Longest Drop Since November” – blame Europe? C’mon:

  1. JAPAN – what goes up on no fundamentals comes down hard – Japanese Equities down for 8 consecutive days for a -8% cumulative correction – and unless your major country index has AAPL in it, that’s pretty much the range of corrections across the world in the last 6 weeks = -7-9% (Hong Kong, Germany, Russia, Brazil, Russell2000, etc).
  2. VOLATILITY – so you’re saying it’s the 1990’s, eh? Right, right. Since the Russell2000 and the CRB Index topped on the same day (March 26th), the US Equity VIX is up +43% in a straight line. Buying anything equities/commodities/big beta at 14-15 VIX has not worked since 2008.
  3. TREASURIES – 10yr bond yield snapping my intermediate-term TREND line of 2.03% support this morning and the Yield Spread continues to compress (down 24bps in 3 wks). This is what we call Growth Slowing being priced into Equities, Commodities, and Bonds. You should have taken that Credit Suisse call to “buy stocks b/c bond yields are rising” and done the opposite.

 

On a net basis, I got longer on red yesterday (14 LONGS, 10 SHORTS). The SP500 should bounce today, but if it can’t close > 1391, we sell again on green and tighten that net exposure back up.

 

KM

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: PNRA, MCD, RT - subsector

 

 

QUICK SERVICE

 

PNRA: Panera Bread has appointed Thomas Patrick Kelly Interim CFO.  The company said that it expects the ongoing search for a permanent CFO to take four-to-six months to complete.

 

MCD: McDonald’s is set to franchise in Russia for the first time under a new deal with Rosinter, the country’s largest restaurant holding company.  The company still plans to open 40 to 45 company-owned restaurants per year in the country but the Rosinter deal allows the company to expand its presence to non-traditional locations like airports and train stations.  There are currently ~300 MCD restaurants in Russia.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

GMCR: Green Mountain Coffee Roasters declined on accelerating volume along with CBOU and JMBA. 

 

 

CASUAL DINING

 

RT: Ruby Tuesday closed the deal to acquire Lime Fresh Mexican Grill for $24 million.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

RT: Ruby Tuesday underperformed again yesterday.

 

RRGB: Red Robin Gourmet Burger declined 3.3% on accelerating volume yesterday.

 

THE HBM: PNRA, MCD, RT - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


THE M3: LVS MACAU/SPAIN; EASTER

The Macau Metro Monitor, April 11, 2012

 

 

SANDS PLANS GLOBAL CASINO PUSH ON SPAIN, ASIA INVESTMENTS Bloomberg

LVS chairman Adelson said his Asian business is seeking Macau government approval for an added 3,600-room casino hotel.  He also plans to spend $35 billion on building Spanish gambling resorts over nine years, building 12 resorts in three phases, each featuring 3,000 rooms intended to attract Eastern European and Russian visitors.  Adelson said with ongoing negotiations with the Spanish government, it will be decided in the next two to three months whether the strip will be in Madrid or Barcelona.  Adelson added that the company’s total investment may amount to as much as $15 billion in Macau, including spending on existing properties and the new location announced today in the territory.

 

TOUR GROUPS NOT INCREASING DURING EASTER HOLIDAY Macau Daily News

The Director of Travel Industry Council of Macau said that Macau's tourism sector was not encountering rapid growth during this Easter holiday as many people from Hong Kong opted for short-haul travel.  With Sands Cotai Central opening on April 11, the increase of guest rooms is believed to help stabilize room rates and attract more package tourists as well as individual tourists.



THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – April 11, 2012


As we look at today’s set up for the S&P 500, the range is 41 points or -0.85% downside to 1347 and 2.39% upside to 1391. 

                                            

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:


VOLATILITY – so you’re saying it’s the 1990’s, eh? Right, right. Since the Russell2000 and the CRB Index topped on the same day (March 26th), the US Equity VIX is up +43% in a straight line. Buying anything equities/commodities/big beta at 14-15 VIX has not worked since 2008. 

  • ADVANCE/DECLINE LINE: on 4/10 NYSE -2133
    • Down from the prior day’s trading of -1747
  • VOLUME: on 4/10 NYSE 972.15
    • Increase versus prior day’s trading of +34.17%
  • VIX:  as of 4/10 was at 20.39
    • Increase versus most recent day’s trading of +8.40%
    • Year-to-date decrease of -12.86%
  • SPX PUT/CALL RATIO: as of 04/10 closed at 1.52
    • Decrease from the day prior at 2.10 

CREDIT/ECONOMIC MARKET LOOK:


TREASURIES – 10yr bond yield snapping our intermediate-term TREND line of 2.03% support this morning and the Yield Spread continues to compress (down 24bps in 3 wks). This is what we call Growth Slowing being priced into Equities, Commodities, and Bonds. You should have taken that Credit Suisse call to “buy stocks b/c bond yields are rising” and done the opposite. 

  • TED SPREAD: as of previous day trading 39
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 2.01
    • Up from the prior day 1.98
  • YIELD CURVE: as of this morning 1.72
    • Increase from prior day’s trading at 1.70 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, week of Apr. 6 (prior 4.8)
  • 7:30am: Atlanta Fed’s Lockhart to discuss economy at Stone Mountain, Georgia
  • 8:20am: Lockhart gives welcome remarks at Atlanta Fed conference on financial reform in Stone Mountain
  • 8:30am: Import Price Index (M/m), Mar., est. 0.8% (prior 0.4%)
  • 9:30am: Kansas City Fed’s Esther George speaks at conference on debt, deficits, financial instability in New York
  • 10:30am: Boston Fed’s Rosengren speaks as part of panel at Atlanta Fed conference on financial reform in Stone Mountain
  • 10:30am: DOE inventories
  • 1pm: U.S. to sell $21b 10-yr notes (reopening)
  • 2pm: Fed Beige Book
  • 2pm: Monthly Budget Statement, Mar., est. -$196b (prior -$188.2b)
  • 4pm: St Louis Fed’s Bullard meets with reporters before lecture at St Louis Fed
  • 5pm: Bullard delivers welcoming remarks for lecture at St. Louis Fed
  • 5:30pm: Fed Board’s Yellen speaks on economic outlook, policy before Money Marketeers of New York University 

GOVERNMENT:

    • Mitt Romney holds campaign events in Connecticut, Rhode Island
    • Secretary of State Hillary Clinton hosts G-8 foreign ministers discussion at Blair House in Washington. 11:45am

WHAT TO WATCH:

  • Oaktree Capital, Aleris, Brightsource Energy among IPOs expected to price as most capital may be raised in 13 months
  • Swiss court rejects U.S. push on disclosure of Credit Suisse client’s data
  • Carlyle said to seek IPO value of as much as $8b
  • Las Vegas Sands plans to spend $35b building Spanish gambling resorts over next 9 yrs
  • Japan machinery orders unexpectedly rise in recovery boost
  • China March car sales rise 4.5% on widening discounts
  • Prepaid card  use rose by about 18% in 2011 as consumers dropped traditional banking products: Javelin Strategy
  • Romney holds campaign events in Connecticut, Rhode Island day after Rick Santorum leaves race
  • Carl Icahn set deadline for today for Amylin to respond to his request for books, records 

     EARNINGS:

    • Astral Media (ACM/A CN) 7:25 a.m., $0.66
    • Dollarama (DOL CN) 7:30 a.m., $0.69
    • Adtran (ADTN) 8 p.m., $0.20 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Wheat Seen Declining as Stockpiles Expand to Record: Commodities
  • Oil Rises From Eight-Week Low as ECB Signals Support for Spain
  • Corn, Wheat Gain on Rising China Demand Prospects; Soybeans Drop
  • Gold May Decline as Some Investors Sell Amid Europe Debt Concern
  • Copper Rises as Chinese Car Sales, Japanese Orders Top Estimates
  • Billionaire’s India Strategy Dims as Oil Deal Deadlocked: Energy
  • France Remains ‘Open’ to Oil Stockpile Release, Besson Says
  • Indonesia Asahan Aluminium Smelter Unaffected by Earthquake
  • Rubber Declines to Two-Month Low as European Crisis Saps Demand
  • Kenyans Almost Dead on Worst Roads Getting New Highways: Freight
  • U.S. Beef Sales to Japan May Gain 24%, Exporter Group Says
  • Alcoa Posts Surprise Profit After Aluminum Orders Increase
  • Soybean Key Reversal Signals 8.9% Price Drop: Technical Analysis
  • Gold May Decline Amid European Debt Concern
  • China’s Aluminum Demand to Grow at 8-10% Annually, Novelis Says
  • Sugar Output in India to Drop for First Time in Four Years
  • Japan’s Zinc Consumption May Climb to 4-Year High, Mitsui Says

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 6

 


ASIAN MARKETS


JAPAN – what goes up on no fundamentals comes down hard – Japanese Equities down for 8 consecutive days for a -8% cumulative correction – and unless your major country index has AAPL in it, that’s pretty much the range of corrections across the world in the last 6 weeks = -7-9% (Hong Kong, Germany, Russia, Brazil, Russell2000, etc).

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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